Argentina Kowtows To “Paris Club” on Debt, Thinks It Won

Thank you Economy Minister Axel Kicillof! I have literally been waiting years to find the context to make a Yes Paris joke.

The bond markets and financial news outlets were abuzz last week with the fact that Argentina reached an agreement with the Paris Club of creditors to repay US$9.7 billion of arrears from the 2001 financial crisis. The payments will be made over a five year period, beginning with a minimum US$1.15 billion to be settled by May 2015, and a second payment to be made a year later. Kicillof has already committed to making the first payment of US$650 million this July. If repayment is made within five years, the interest rate charged will drop from 7 percent to 3 percent.

So what in the world is the Paris Club? Go ahead, Wikipedia it, I dare you. The Paris Club is basically an unofficial bankruptcy court for poor indebted nations who can save on airfare and go to one place at one time to plead their cases to not pay their debts as originally agreed.

The Paris Club is what we call a group of financial officials from Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, The Netherlands, Norway, Russia, Spain, Sweden, Switzerland, The United Kingdom, and The United States. This group meets every six weeks in Paris and makes decisions multilaterally to restructure, reschedule, or forgive debts.

And last week, Axel Kicillof met with le club to plead the case of Argentina and emerged, in his mind and the minds of many, victorious. And this my friends, is a brilliant feat of diplomatic showmanship on his part akin to President Nixon opening the United States up to China in the 1970′s.

Since Argentina’s 2001 default, the Kirchners have bellicosely defended not paying back the vulture funds as a national point of pride. Argentina will not kowtow to the evil colonial powers that wish to decimate the developing world with neoliberal policies! Never! But when it comes to Paris Club, Cristina has been calling for the payment of the debt since 2008.

So now Axel Kicillof waltzes in with his magical sideburns and does exactly that, while claiming a “moral victory” for Argentina mostly because the IMF did not get involved in the deal, as is common with Paris Club debt restructuring deals.

Argentina has been shut out from international capital markets after its 2001 default on about $100 billion in debt and is still fighting with the “holdout” bondholders – now mostly hedge funds – who refused to agree to the haircuts of the prior debt restructuring, a dispute that may end up before US Supreme Court. Argentina claimed that it may be pushed into technical default if it loses. But now, according to Argentina’s Cabinet Chief, a deal might even be possible with the holdouts.

Kicillof, careful to place the blame for incurring this debt on previous governments – “Argentina is continuing its path of regularizing and paying off the debt that 40 years of neoliberalism left us,” he explained from Paris – has pointed out repeatedly that the default hinders trade opportunities with members of the Paris Club (aka some of the more important markets in the world). By paying off this debt, he hopes to reopen trade financing opportunities via international export credit agencies.

Implicit in this are the next steps for Argentina’s economy: relaxing barriers to trade. Kicillof himself stated that Argentina is not seeking to issue debt in the short term. And while paying off the debt is an important step to attracting export finance, the next and necessary logical step to make that worthwhile is permitting these products to exit the country.

Currently, exporters in Argentina face a complicated system of export tariffs, non-tariff barriers such as licensing requirements and quotas, and then if they can prevail over that veritable mess, the damning dual currency problem. The effective dual exchange rate (the official rate vs. the prevailing unofficial “blue” rate) acts like an additional tax on exporters.

For example, imagine you exported 100 bottles of malbec wine and sold them for $20.00 per bottle in the United States (you can’t export malbec to the Paris Club; they only drink champagne). Stripping away export and import costs for simplicity, you should have earned $2,000.00. But Argentina forces exporters to bring sale revenues back into the country at the official rate, or roughly 8 pesos for each dollar. In this example, at the unofficial rate you would have earned 22,000 pesos but at the official rate those earnings fall to 16,000 pesos. That difference can be viewed as a tax paid to the state.

Additionally, importers face harsh to impossible restrictions, including requirements to offset imports by exporting. For example, many car companies operating in Argentina simultaneously export things like olive oil to have the ability to offset and thus be permitted to imported necessary parts.

Dismantling Argentina’s complicated and culturally-entrenched barriers to trade will be painful at first and politically hard to sell, as these barriers fund many of the subsidies that saturate the economy at every level.

But just as it took a staunch anti-communist like Richard Nixon to open up to China without being politically destroyed, perhaps it takes a dyed-in-the-wool leftist like Axel Kicillof to dismantle Argentina’s politically sensitive subsidies, trade barriers, and currency controls.

Committing to pay off Argentina’s debt are difficult and meaningful steps in a positive direction. Hats off to Axel, and I look forward to seeing what happens next. By Bianca Fernet, The Bubble.

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